Summary:
The State Pension is subject to the triple lock system, which limits how much it can increase based on inflation.
The cash flow chart shows real values by adjusting for inflation.
The triple lock system and real values in the cash flow chart may result in a different increase in the State Pension.
In the event of inflation smaller than 2.5%, the state pension will increase.
In the event of inflation greater than 2.5%, the state pension will remain the same.
If inflation is smaller than 2.5%, and the state pension increases up to 2.5%, your purchasing power rises, and you need to withdraw less from investment accounts.
Why do I see an increase in the state pension in the cash flow chart?
Imagine you're a financial advisor helping Mr and Mrs Smith plan for their retirement. You've built a detailed financial plan for them, showing how their income and expenses project over time. One of the key components of their retirement income is the State Pension. But as you're reviewing the cash flow chart, you notice that the State Pension seems to increase more than you expect, even though the chart is in real terms. You start to wonder, what's going on here?
Timeline applies to the State Pension, a system known as the triple lock. In simpler terms, the triple lock guarantees that the State Pension will increase yearly by at least 2.5%, or in line with inflation - whichever is the highest. This helps ensure that pensioners like Mr and Mrs Smith can maintain a decent standard of living.
Imagine it's a new year, inflation is at 2%, and the State Pension is £10,000. First, the State Pension would increase to £10,200, in line with inflation. But wait, there's more! Because the triple lock guarantees a minimum increase of 2.5%, the State Pension would go up to at least £10,250.
When it comes to the cash flow chart, we show real values. This means that we adjust the State Pension increase for inflation. The growth you see in the cash flow chart may be different:
In the case of inflation smaller than 2.5% for a given year, converting to real will cause the State pension to increase in value.
If the inflation for a given year is more than 2.5%, then the value will remain the same in real terms.
So there you have it. The State Pension increase in the cash flow chart may appear higher than expected due to how it's adjusted for inflation due to the triple lock system. By knowing how inflation and the triple lock affect the State Pension increase, you can provide more accurate and reliable advice to your clients.